What exactly is impact investing and how does is work? Fuqua's Center for the Advancement of Social Entrepreneurship (CASE) is leading the way on impact investing research. Professor Cathy Clark breaks down the trend in a Fuqua Q and A.
1. What is impact investing?
Impact investing is the act of investing money with the deliberate intention of achieving both financial value (return on capital) and social value (positive impact on social and environmental problems.) Impact investing is a new term but the practice has been around for decades. The strategy encompasses a broad range of activity from microfinance and community development finance, to investments in renewable energy, global health, education and international development.
Impact investors range from private foundations (like Gates, Rockefeller, and Kellogg) to private banks (like Deutsche Bank, JP Morgan, Morgan Stanley) to development and government agencies (like USAID, DFID, OPIC and the SBA) to privately held funds and individuals around the globe. Fuqua's CASE i3 Initiative on Impact Investing is the first comprehensive initiative at a top US business school working with partners around the globe to develop the field.
While socially responsible investing insists that anyone who owns a portion of a public company has the right to voice their interest in that company's non-financial impacts, impact investing focuses more on privately-owned companies and nonprofit revenue-generating organizations. These ventures often have much greater flexibility to direct their time and attention to positive social outcomes. Organizations that bake in their social value creation are attractive to employees, and are increasingly attractive to a diverse range of investors targeting strategic objectives as well as financial ones.
2. Give us an example of when impact investing worked.
There are so many examples of social ventures and investment funds making a real difference, it's hard to choose! Let me tell you about two funds I admire and their very different work. SJF Ventures is based in Durham, North Carolina. The fund started out as a community development finance institution (CDFI) and aimed to invest in companies creating jobs in low-income neighborhoods while also creating positive impacts on the environment. Today SJF invests venture capital equity in high growth, positive impact companies and has provided returns in the top decile of funds created in their same year. Their investments in 34 companies have created over 6400 new jobs, and 65% of their company locations are in low to moderate income areas in the US.
Calvert Foundation is a completely different animal. It is a nonprofit fund that makes loans to enterprises and funds around the world, through several low-interest debt vehicles. Calvert Foundation noteholders have never lost a dollar and have earned low single digit returns. The organization allows investors to start with as little as a $20 investment, while having an impact around the globe in community development, affordable housing, microenterprise, social enterprise, and fair trade companies.
There are literally hundreds of examples of investors like this, and they have funded tens of thousands of impact entrepreneurs. Some consumer-focused companies you might not realize were funded by impact investors: Stonyfield Farms (organic yogurt), Zipcar (environmentally friendly car-sharing), Honest Tea (responsible supply chain for iced tea), and RecycleBank (curbside recycling meets couponing). The list also extends internationally: Grameen Bank (microfinance pioneer), Husk Power Systems (rural electrification), A to Z Textile Mills (anti-malarial bednets), Liberty and Justice (women-owned manufacturing) and LifeSpring (low-cost maternity hospitals). For more, look at the list of B Corporations, ANDE members or the Acumen Fund portfolio.
3. CASE is part of a study with InSight at Pacific Community Ventures and ImpactAssets. In recent research, the group spoke with dozens of investors and companies about impact investing. What did you learn about how impact investing is working?
The study was part of our Impact Investor project. We learned that impact investing as a concept is strong, but practices of how you successfully harvest your returns across diverse vehicles are still emerging. There is a continued disagreement about how to balance objectives - achieving impact or earning market-level returns? We are concerned that until the impact investment marketplace becomes a more rational market, with historically stable returns for different kind of investments, the market will stay rather thin and fragile. If you think all impact investment will get you "concessionary" or below-market returns, you'll be missing some great opportunities. And vice versa, if you think investing must be just market rate or higher, you'll be missing an opportunity to diversify your portfolio. A two to three percent return you can count on sounds pretty good right now!
4. What are you learning about best practices in impact investing? What is the key to making it work?
Our conversations with the limited partners and fund managers were particularly revealing - we identified six dynamics (read about them here) that reveal unique relationships and challenges that impact investment fund managers face in reaping social and financial returns.
Many of them feel their work requires them to be entrepreneurs themselves, constantly evolving to please an extremely diverse set of stakeholders. We spent the last few months identifying fund managers around the globe who are outliers (having achieved exceptional returns), and now we are studying them in-depth.
5. Your research found nearly 60 new impact funds were created in 2011. That's up from previous years. Do you expect the trend to continue to grow?
JP Morgan estimated in 2011 that in ten years the impact investing marketplace will be worth $400 billion to $1 trillion. According to the Global Impact Investing Network, over $4.4 billion was invested in 2011 alone. But, to think that all of these new funds will be successful is a bit foolhardy. This is hard work.
I hope that in five to ten years we have recognized segments of impact investing that achieve certain kinds of predictable social and financial returns. Through this project and others, CASE i3 is working to support this vision. Then, as Lisa Hall of Calvert Foundation, one of our advisors, has said, everyone can truly be an impact investor. Everyone can make a difference with their investment dollars, earn a return they can count on, and feel good about impact investing being part of their overall investment portfolio. Who wouldn't want to do that?